Like so much of the American business landscape over the last three years, commercial property management has changed – often abruptly.
With the economy straining to hang on, more brokers moving into property management, the unprecedented number of foreclosures, crowds of clients coming from out of state and relationships with banks and other lenders in flux, Nevada’s real estate industry must find ways to adapt in order to survive.
The combination of forces “has changed property management,” says Marge Landry, President and principal of Landry & Associates, Inc. in Las Vegas. “The biggest change that my company has seen is that many of the mid-range to smaller companies have merged with national companies. As a local commercial real estate company, we find ourselves not only competing with brokers who have decided to open up a property management division so they can have monthly income, but with the residential property managers who didn’t previously go after the commercial business.”
The stress in the economy, says Frank Gatski, principal of Gatski Commercial Real Estate Services in Las Vegas, has greatly increased the pace of his and others’ business in property management. “It has created new challenges, but mainly our clientele has changed, as you can imagine. There are a lot more banks and lenders that we are dealing with today (involved with) receiverships and that sort of thing.”
Gatski sees more of the same for the year ahead, particularly more properties going back to banks and other lenders. Still more are going to go into receivership and require good, professional property management.
Since 2008, David Krantz, Vice President of Real Estate Services for RMI Management, LLC in Las Vegas, and many of his competitors have been, as he puts it, “taking one step forward and two back. We have this constant leak in our bucket, and really through no fault of our own – it’s not that we’re providing a poor service, or losing clients to other businesses – the asset that we were managing has been foreclosed on by the bank, and so we’re done.”
There is, as he describes, “an awful lot of work involved with that – to close out a property, to deal with the tenants, to return deposits and answer all those questions that are unfamiliar to all the parties involved. So it has created a lot more work for us.”
“Many management contracts are written on a percentage fee basis of revenues collected,” Ronald Jones, President, CEO and principal of Nevada Commercial Services in Reno, points out. “Naturally, with the downturn in the economy there has been less revenue collected, so revenues to third-party management companies have taken a bit of a hit.”
In his own shop, Jones has been involved with a lot of receiverships. “We have certainly held our own in back-filling the loss of revenues from our fee-management work.”
Brokers Breaking In
The involvement in property management of a growing number of brokers has increased competition in an already hurting industry segment.
“You know, I do believe that the commercial real estate industry has changed in that regard,” says Gatski, “with a lot of companies that used to focus on brokerage putting more energy and emphasis into their property management departments.” Most of that, however, is happening in the residential sector, he adds. “I’m not seeing too much of that in the commercial real estate industry.”
The increased numbers of brokers involving themselves with property management has, for one thing, driven prices down. As a result, says Krantz, the field has grown “a lot more competitive. It’s created more problems for clients. A lot of these new entrants don’t know what they’re doing.”
There is, Krantz correctly identifies, a tendency for the brokers to want to hang onto their clients. “Rather than refer them out to a management company they decide, ‘I’ll do that so I don’t lose contact with my client.’ In exchange, the level of service and what they’re providing certainly isn’t what (the client) expects.”
Working with Bankers
The nature of property managers’ relationships with bankers “depends on which bank and which lender you’re dealing with at the time,” Gatski reflects. Most naturally don’t want to plug any more capital into the investment. What they do want is to work with companies that can provide value-added services and show them ways to save money on operating expenses.
Gatski has added a tax appeal division to his firm that he says “has saved a lot of those guys tons of money in property taxes. Bankers and lenders are looking at the short-term hold versus the old-fashioned long-term investments that most clients in our industry would own real estate for.” His sales/leasing division is doing very well, he adds. “We’re selling a lot of the assets that the banks are trying to unload, so that’s helped our business. All these buyers are coming in; of course they’re cash buyers, and they’re trying to get the best deal they can.”
“Certainly there is more of that going on,” Jones confirms. “You’re working with a bank for different purposes now. We work with a lot of banks in typical relationships, with our operating and reserve accounts. With many of those same banks, though, we are now involved in managing property they are in control of, either by way of foreclosure or receivership. So yes, our relationship is changing a little bit because of these conditions that have been brought on by the economic downturn.”
RMI has not found itself working with bankers more. “But,” says Krantz, “we’d love to. It would be our hope to deal with them a lot more. We’d like to do that; we’ve tried to align ourselves with them. The problem is banks don’t want to hold real estate.” Instead, he suggests, they are getting legal advice from in-house counsel not to. “They just have an absolute aversion to even hanging onto real estate.”
Krantz’s advice to bankers, perhaps not surprisingly, would be just the opposite: “‘Hey, hold onto it, fill it, we can send you money and times will get better. You will actually get a better return when the market gets better.’”
“If the lender isn’t familiar with the current property management/leasing company then he may prefer to go with a national company,” Landry recounts. “Sometimes there isn’t time to go through the qualification process, so they may ask you for a bid. But ultimately because the timing for the foreclosure is so quick they end up going with the national company that they already have a relationship with.”
The other thing that Landry says she is finding is that if a company like hers does get hired by a lender on a foreclosed property, the contracts are typically running anywhere from six to nine months. “So it’s short term,” she concludes, “making it very difficult to project your cash flow for the future.”
Landry says her firm has worked with one particular national lender on five separate properties over the past two years. She was originally quite concerned that it would be difficult to build a relationship with a corporate lender. Fortunately, she says, her experience has been very good.
“Again, in talking to some of my competition I find that they haven’t been as fortunate as I have been,” Landry points out. “We don’t go chasing after these foreclosed properties, but if we do retain the management and/or leasing contract then when they sell it it does allow an opportunity for the future to perhaps bid on it with the new owner.”
The firm has actually done that twice, she adds. “We’ve done it with the bank for a number of months; they sell it and somebody comes in, they don’t know who to hire, we’re already there, and they’re thinking, ‘We retain them.’”
Out of Towners
“It’s absolutely correct that most of the owners and investors are from out of town,” Krantz confirms, “but I don’t know that that’s changed a lot from years past.”
For many of her competitors, Landry confides, the lion’s share of their clients are local owners. The issues they’re dealing with is this: “The local owner whose building is 50% vacant is saying to himself, ‘Why don’t I just manage it myself until the economy gets better?’ They’re losing business back to local owners.”
Landry feels fortunate, she adds, that she built her business on out-of-state investors. Indeed, fully 95% of her clients live out of state, she says, which makes the dollars-and-cents calculation an easy one. “It’s less expensive to pay my company to manage than it is for them to fly in and out.”
As for his predictions about what 2012 holds in store, Gatski – with almost 8-million sq. ft. in Las Vegas and thus an excellent feel of pulse on its commercial real estate economy — says he wants to “throw a little bit of optimism out there.” He has seen that a lot of his 1,200 to 1,500 commercial tenants have been less delinquent in paying their rent, and that there have been noticeably fewer evictions. “Those are positive signs that people are able to sustain their businesses and pay their rents on time, which is good for all of us.”
Over and above that, Gatski adds, his firm’s leasing has increased “tremendously. It’s one of our strong suits here. We have probably closed over 300 lease transactions this year, so those are all positive signs in the trenches, so to speak.”
And this is one industry that can use all the positive signs it can find.
